Autoliv, Inc.’s (NYSE:ALV) shares are still awarded a Hold rating. I have considered both the negatives relating to ALV’s Q2 performance, and the positives associated with the company’s expense management and the China market’s sales mix.
My previous September 12, 2023 article analyzed ALV’s shareholder capital return and the impact of the United Auto Workers (or UAW) strike. The focus of the latest write-up is Autoliv’s results, guidance, and disclosures pertaining to China and cost optimization.
Autoliv’s prospects for 2024 are unfavorable, taking into account its Q2 results miss and below-expectations full-year guidance. On the flip side, ALV’s financial performance might improve after 2024, assuming that the company’s expense optimization initiatives deliver results and its sales derived from Chinese automotive OEMs (Original Equipment Manufacturers) grow.
Second Quarter Results Were Disappointing
Last Friday, Autoliv published a press release revealing its Q2 2024 financial results.
ALV’s revenue declined by -1.1% YoY to $2,605 million in the second quarter of the current year. Prior to this, Autoliv had achieved eight consecutive quarters of positive top line expansion on a YoY basis between Q2 2022 and Q1 2024. Furthermore, the company’s actual Q2 2024 represented a -4.6% miss as compared to the market’s consensus sales estimate of $2.73 billion.
In its Q2 2024 results presentation slides, Autoliv highlighted that the company’s organic sales growth in China underperformed the light vehicle production expansion for the market by -7 percentage points. ALV noted in its Q2 results presentation that “certain models with low Autoliv content (were) growing strongly, while some key global customers’ production (were) declining” in the latest quarter. In other words, Autoliv performed poorly in China, and this led to a Q2 2024 top line miss for the company.
Autoliv reported normalized earnings per share or EPS of $1.87 for Q2 2024, and this was equivalent to a -2.9% contraction on a YoY basis. ALV’s second quarter bottom line turned out to be -15.5% lower than the sell-side analysts’ consensus EPS projection of $2.21.
The company indicated in its Q2 2024 results press release that its below-expectations second quarter revenue “impacted our profitability” with “an operating leverage at the high end of our normal 20%-30% range.” ALV’s comments suggest that the company’s profit margins were affected by negative operating leverage resulting from the unexpected decline in its top line. The YoY improvement in Autoliv’s operating margin narrowed from +252 basis points in Q1 2024 to +44 basis points for Q2 2024, and ALV’s actual second quarter operating margin of 4.84% missed the consensus forecast by -138 basis points (Source: S&P Capital IQ).
In summary, the company’s key financial metrics for the most recent quarter were below Wall Street’s expectations.
Updated Full-Year Guidance Came In Below Consensus Estimates
ALV revised the company’s FY 2024 guidance when it released its second quarter results.
The company’s organic revenue growth guidance for the current year was lowered from +5% to +2%, while management revised the 2024 operating margin guidance downwards from 10.5% to 9.75% (mid-point). Prior to the issuance of its updated full-year guidance, the sell side’s consensus top line expansion and operating margin estimates for 2024 were +4.3% and +10.5%, respectively as per S&P Capital IQ data.
At the company’s Q2 2024 results briefing, Autoliv noted that its full-year outlook was set assuming “a global light vehicle production decline of around 3% instead of 1%” which will have a “negative impact on our sales, adjusted operating margin.” This means that ALV’s FY 2024 revenue and profitability will likely be affected by a worse-than-expected slowdown in the worldwide automotive market and negative operating leverage, respectively.
If one looks beyond 2024, there are reasons to be optimistic about ALV’s prospects in 2025 and beyond as detailed in the subsequent two sections.
Expense Management Initiatives Are On Track To Deliver Targeted Cost Savings
Autoliv emphasized in the company’s Q2 earnings presentation slides that it “progressed” with its “structural cost reduction activities” which are associated with digital transformation and operating with a leaner workforce.
The company’s goal is to double its annual cost savings associated with expense management initiatives from $50 million this year to $100 million in the following year, and eventually increase this figure to $130 million (Source: Q2 Earnings Call) in time to come.
There are indicators suggesting that ALV’s cost management initiatives are on track to deliver the targeted expense savings for the company. Autoliv’s gross margin expanded by +1.3 percentage points QoQ and +1.2 percentage points YoY to 18.2% in Q2 2024. On the other hand, the company’s internal metric “direct labor productivity index” which measures “sales in relation to direct headcount” as mentioned in its results presentation has improved by more than +20% since the beginning of 2020.
As such, I have a favorable opinion of Autoliv’s ability to expand its operating profit margin from 8.8% last year to 12.0% for the intermediate term as per its Investor Day disclosures.
Revenue Mix In China Market Is Expected To Improve Over Time
In an earlier section of this article, I cited the underperformance of ALV’s operations in China as a major factor contributing to the company’s second quarter top line miss.
Autoliv acknowledged at its Q2 2024 earnings briefing that “the fast-growing market share for Chinese OEMs” has “a negative impact on our ability to outperform light vehicle production in China.” In its second quarter results release, ALV disclosed that it generated 38% of its Q2 2024 sales for China from Chinese OEMs.
It is reasonable to infer from ALV’s commentary and disclosures that the company seemed to be relatively more reliant on international OEMs in China where domestic OEMs are gaining share.
Moving ahead, ALV stressed in its Q2 results presentation that the company is “strengthening our position with fast-growing domestic Chinese OEMs.” Autoliv’s commitment to optimizing its revenue mix with a tilt toward Chinese OEMs is reflected in the company’s key metrics. ALV’s China sales contribution from domestic OEMs was an even lower 20% (Source: Earnings Presentation) in Q1 2022 versus the latest quarterly figure of 38%. Also, the company’s China sales generated from Chinese OEMs increased by +39% YoY and +25% QoQ (Source: Results Press Release) in the most recent quarter.
Therefore, it is highly probable that Autoliv’s performance for the company as a whole and for the Chinese market will get better going forward when ALV does more business with domestic Chinese OEMs.
Final Thoughts
A Hold rating for Autoliv is warranted. ALV’s 2024 outlook is underwhelming based on an assessment of the company’s Q2 performance and updated full-year guidance. There are certain factors like good expense management and an increase in sales contribution from domestic OEMs in China which could possibly boost Autoliv’s results in 2025 and beyond.
Moreover, ALV’s current valuations have factored in both the company’s disappointing prospects for 2024 and the potential improvement in its financial performance in subsequent years. Autoliv is now trading at a consensus current fiscal year normalized P/E of 11.1 times, while its consensus FY 2023-2028 normalized EPS CAGR forecast is 12.6 times (Source: S&P Capital IQ). This implies that ALV’s PEG (Price-to-Earnings Growth) ratio of 0.88 times (11.1/12.6) is at a 12% discount to a fair PEG multiple of 1 times. I will typically demand at least a PEG of 0.8 times or lower (20% discount to fair PEG multiple) to deem a stock as being undervalued, which isn’t the case for Autoliv.
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